Toward Enhancing SMEs' Resilience
As large-scale natural disasters occur year after year, many small and medium-sized enterprises (SMEs) struggle with slow recovery. In response to this situation, in May 2019, the Act on Partial Amendment of the Act on Enhancement of SME Management to Contribute to Continuation of Business Activities by SMEs (SME Resilience Enhancement Act) was enacted. Under this law, regional financial institutions are expected to contribute to support the formulation of business continuity plans (BCPs) by SMEs, as formulating BCPs is useful in enhancing SME resilience.
The motivation for our research was to enhance the resilience of SME business management. As a result of this research, in September 2020, we published the book titled Large-Scale Disaster Risk and Regional Companies' Business Continuity Plans—Enhancement of SMEs' Resilience and Support by Regional Financial Institutions (Chuokeizai-Sha Inc. in Japanese), which analyzes the current status of BCP formulation and support.
Two Questionnaire Surveys with Companies and Financial Institutions' Frontline Officers
This book represents the results of two research projects—"Research on Stable Development of Regional Economies amid Population Decline" and "Regional Economies and the Role of Regional Financial Institutions as the Core of Regional Collaboration"—which were implemented by the Research Institute of Economy, Trade and Industry (RIETI) between 2017 and 2019.
From previous surveys and research work, it has become clear that in the event of a disaster, companies that make advance preparations can reduce direct damage, restore operations earlier, and face fewer difficulties in securing emergency funding compared with companies that do not make such preparations. Formulation and implementation of BCPs constitute the pillar of advance preparation.
Therefore, in order to improve the business continuity capability of SMEs and micro-enterprises, the SME Resilience Enhancement Act introduced a mechanism that encourages those enterprises to formulate plans for strengthening that capability. Our research focused on how to create a situation in which more companies have substantial BCPs—in other words, what is necessary for increasing the effectiveness of the SME Resilience Enhancement Act.
For the purpose of this analysis, we conducted two questionnaire surveys. One is the "Survey on Companies' Sentiment about Business Continuity Plans (BCP)," which was distributed to 10,000 companies (of which 2,181 replied) in October 2018. The other is the "Survey on SME's Preparations for Natural Disasters and Support by Regional Financial Institutions," which was sent to 7,000 branch managers of regional financial institutions (of whom 2,623 replied) in May 2019. This survey was conducted in light of the attention paid by the SME Resilience Enhancement Act to regional financial institutions' support for BCP formulation.
Our new book is based on these two questionnaire surveys. Here, we provide a look at some of the survey results that are likely to contribute to policy-planning.
Slow Progress in BCP Formulation among Small Financial Institutions' Clients
According to a survey conducted by the Small and Medium Enterprise Agency, the BCP formulation rate is 15.5%. Our recent survey found that the BCP formulation rate was slightly higher, at 22.6%, partly because the survey was targeted at relatively large companies (companies with a workforce of 20 or more employees in principle). Even so, only around one in five companies has formulated a BCP.
What is interesting is that while the BCP formulation rate is 32.2% among major banks' client companies (companies doing business with major banks as their main creditor banks), the rate is much lower among regional banks' client companies and among Shinkin banks (Note 1)' client companies (a Shinkin bank is a type of Japanese depository institution), at 17.4% and 13.9%, respectively. While the rate of 32.2% among major banks' client companies is also insufficient, it is essential to strengthen the capability of regional banks, shinkin banks, and credit unions to support BCP formulation when we consider to the best methods of promoting financial institutions' support for BCP formulation under the SME Resilience Enhancement Act.
Importance of Know-how-Related Support
When we asked companies that had not formulated a BCP why they had not done so, the most frequently cited reason was "a lack of skills and know-how necessary for BCP formulation" (52.5%). On the other hand, only 10.5% cited "a lack of an incentive program such as a discount on guarantee fee or interest rate."
Naturally, even if companies can receive subsidies, they cannot formulate BCPs without the necessary know-how. As the process of BCP formulation itself leads to the enhancement of resilience, emphasis should be placed on providing knowhow-related support.
However, there are some points of caution. One is that among companies with badly performing businesses, a high percentage chose "a lack of an incentive program such as a discount on guarantee fee or interest rate." Another is that our survey was targeted at relatively large companies. Therefore, the possibility cannot be ruled out that providing subsidies or other financial incentives may be effective as a measure to support micro-enterprises with harsh business conditions.
Many Companies Have the Perception of Financial Institutions Not Being Interested in BCP
In the survey, we asked companies about their main creditor banks' assessment of the contents of BCPs and the status of BCP formulation. The percentage of companies that replied that the banks were not interested or that they did not know about the banks' assessment was as high as 78%. Although companies and financial institutions often cultivate close relationships on a routine basis, BCP is apparently a topic that is seldom mentioned in their communications. Indeed, even among companies that replied that they were visited by a financial institution employee "more than once a week," only 8.6% said that they "discuss emergency response with the financial institution." Given the results, it is natural that companies have the perception that financial institutions are not interested in BCP.
Financial Institution Frontline Officers' Lack of Interest in Client Companies' BCPs
Next, we will provide an overview of the results of the survey with financial institutions' branch managers in order to look at the current status of support for BCP formulation from the standpoint of financial institutions.
We asked financial institutions' branch managers about the percentage of companies that had formulated a BCP among the client companies doing business with their branches as their main creditor banks. More than half replied that they did not have a grasp of the status of client companies' BCP formulation. Of the branch managers who cited a specific percentage, more than half replied that less than 5% of their client companies had formulated a BCP. Compared with the BCP formulation rates arrived at through the surveys conducted by the Small and Medium Enterprise Agency (15.5%) and by us (22.6%), this figure is very low.
It is likely that most financial institutions' frontline staff do not have an accurate grasp of the status of client companies' BCP formulation.
Head Offices Must Show a Positive Attitude
What I would like to point out is not negligence on the part of frontline staff. My point is that head offices are not making sufficient efforts to make it understood by frontline staff that supporting client companies' BCP formulation is necessary for the sustainable growth of both the companies and the financial institutions.
In the survey with branch managers, we asked them about their assessment of their financial institutions' attitude toward support for client companies' BCP formulation. On the whole, the perception of a negative attitude was greater than the perception of a positive attitude. More specifically, the total of the percentages of branch managers who perceived a "very negative" attitude (10.2%) and a "somewhat negative" attitude (29.2%) was higher than the total of the percentage of those who perceived a "very positive" attitude (3.7%) and those who had the perception of a "somewhat positive" attitude (25.3%). These results show that at present, head offices' negative attitudes toward BCP are being reflected in the lack of interest among frontline staff.
The enactment of the SME Resilience Enhancement Act was meant to provide an impetus for change in the attitudes at head offices. It is essential to make the purpose of this law fully known to the head offices of financial institutions.
BCP Should Be Incorporated into Feasibility Assessments
To ensure that financial institutions provide BCP support, the starting point should be incorporating the BCP into routine dialogue between financial institutions' frontline staff and companies.
The feasibility assessment activity of financial institutions has improved under the Financial Services Agency's strong leadership. According to our survey, 60.1% replied that the feasibility assessment capability of sales personnel in charge of corporate clients improved compared with three years before. However, even among financial institutions that replied that they could appropriately conduct feasibility assessments, as many as 58.1% did not have a grasp of the status of client companies' BCP formulation. In other words, there is no correlation between the deepening of commitment to feasibility and the attitude toward BCP. This means that the current feasibility assessment activity does not contain the BCP element.
However, the feasibility assessment includes assessing companies' sustainability. It is natural to incorporate the assessment of natural disaster risks into the framework of feasibility assessments. I believe that doing so will lead to continuous, systematic BCP support by regional financial institutions.
To sum up, while regional financial institutions' feasibility assessment activity has made considerable headway, there are still few financial institutions that are supporting the enhancement of SMEs' resilience against natural disasters based on the full understanding of companies' feasibility. That is exactly the reason for the legislation of the SME Resilience Enhancement Act.
In 2020 as well, large-scale natural disasters have occurred, including the flooding disaster in July, and infection disaster risk has also materialized in the form of the coronavirus crisis. We hope that regional financial institutions will further enhance support for BCP formulation based on feasibility assessments in order to increase the sustainability of SMEs.
August 26, 2020